Another QQE by the Bank of Japan – “Will they or won’t they?”

The 2014 Q4 GDP turned positive after two successive quarters of negative growth which brings some hope to people who have been waiting to see the dawn of better days in Japan. Based on the GDP results and the potentially adverse impact from the implemented QQE, we don’t think the Bank of Japan will or should implement additional qualitative and quantitative easing (QQE) in the short-term.

The Q4 GDP recorded a 2.2% increase (annualised QoQ after seasonal adjustment) among which exports (+2.7%), public investments (+0.6%) and private consumption (+0.3% QoQ) made the largest contributions.

Net exports: Both exports and imports have been rising on a quarterly base. However, the trade benefit that a yen depreciation brings is limited, and the trade balance has become less sensitive to the weak yen.

Public investments: Thanks to the stimulus policies of Abenomics, public investment has been increasing at a steady pace. Coupled with the forthcoming 2020 Olympic Games, we expect this figure to further increase in the following years.

Private consumption: For two consecutive months, private consumption has been increasing. Yet the change has been small at best, and domestic demand has not fully recovered. To tackle insufficient domestic demand, Japan needs to see a general rise in wages. At the moment, some large corporations have agreed on a modest pay rise from April. We should wait for the effects of a pay rise to boost spending and GDP. If rising wages aren’t enough to jump start the economy, an additional QQE cannot be ruled out.

Apart from the limitations mentioned above, there’s also less room left for an additional QQE due to the limited existing government bond balance available for purchase.

The Bank of Japan should wait for the impact of rising wages and Abenomics’ stimulus policies, and then make a decision as to whether to implement another QQE or not. Though undesirable, another QQE cannot be ruled out if deemed necessary.